UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934 (No fee required)
For the quarterly period ended December 31, 2004
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-15113
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VERITEC, INC.
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(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization)
95-3954373
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(IRS Employer Identification Number)
2445 Winnetka Avenue North, Golden Valley, MN 55427
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(Address of principal executive offices, zip code)
763-253-2670
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 15 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes X No
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[Please check appropriate response]
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1
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date. As of February 7,
2005 the Company had:
Number of Shares of Common Stock
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15,078,598
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Transition Small Business Disclosure Format (check one): Yes No X
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[Please check appropriate response]
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2
Table of Contents
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FORM 10-QSB
VERITEC, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION 20
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 22
SIGNATURES 22
3
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
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VERITEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2004 2004
-------------- --------------
(Unaudited) (Audited)
ASSETS
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Current Assets:
Cash $ 881,316 $ 394,067
Certificates of deposit 91,393 120,257
Accounts and notes receivable, net 354,814 949,802
Inventories 18,165 20,730
Prepaid expense - legal retainer 100,000 100,000
Prepaid expenses - other 12,226 10,291
------------- -------------
Total Current Assets 1,457,914 1,595,147
------------- -------------
Property and Equipment:
Furniture and equipment 67,167 66,032
Vehicles 69,557 41,481
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136,724 107,513
Less accumulated depreciation 102,866 94,662
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33,858 12,851
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Other Assets:
Note receivable 10,005 19,622
Security deposits and other assets 29,889 14,270
Software costs, net -- 13,334
Technology rights, net 28,225 41,527
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68,119 88,753
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Total Assets $ 1,559,891 $ 1,696,751
============= =============
See Notes to Condensed Consolidated Financial Statements.
4
VERITEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2004 2004
-------------- --------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable - related parties $ 340,000 $ 390,000
Convertible notes - related party 91,368 747,374
Current maturities of long-term debt 95,803 114,681
Accounts payable 1,623,440 1,485,851
Accrued expenses:
Arbitration award 8,174,518 --
Payroll and related 104,393 129,915
Interest 67,366 231,747
Other 3,049 10,863
------------- -------------
Total Current Liabilities 10,499,937 3,110,431
Long-Term Debt, less current maturities 14,527 169,298
Prepayment on Stock and Subscription Receivable -- 19,811
------------- -------------
Total Liabilities 10,514,464 3,299,540
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Commitments and Contingencies
Stockholders' Deficit:
Preferred stock, par value $1.00;
authorized 10,000,000 shares,
275,000 shares of Series H
authorized, 1,000 and 76,000 shares issued 7,273 366,007
Common stock, par value $.01;
authorized 20,000,000 shares, 15,039,598
and 7,071,849 shares issued 150,396 70,718
Subscription receivable (640,907) (717,717)
Additional paid-in capital 13,269,445 11,990,954
Accumulated deficit (21,755,837) (13,323,448)
Cumulative translation adjustment 15,057 10,697
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Total Stockholders' Deficit (8,954,573) (1,602,789)
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Total Liabilities and
Stockholders' Deficit $ 1,559,891 $ 1,696,751
============= =============
See Notes to Condensed Consolidated Financial Statements.
5
VERITEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended December 31,
2004 2003
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Revenues:
Software $ 412,535 $ 230,787
Hardware 12,198 124,270
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Total revenues 424,733 355,057
Cost of Sales 14,897 52,924
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Gross Profit 409,836 302,133
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Operating Expenses:
Selling, general and administrative 418,518 316,446
Arbitration award 8,174,518 --
Legal 60,094 285,984
Research and development 17,332 53,022
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Total Operating Expenses 8,670,462 655,452
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Loss from Operations (8,260,626) (353,319)
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Other Income (Expense):
Interest income 2,020 --
Interest expense (24,445) (29,967)
Other 2,304 46,509
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Total Other Income (Expense) (20,121) 16,542
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Loss Before Income Taxes (8,280,747) (336,777)
Income Tax Expense -- (470)
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Net Loss $ (8,280,747) $ (337,247)
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Basic and Diluted Net Loss Per Common Share $ (1.17) $ (0.05)
============= ============
Weighted Average Common Shares Outstanding -
Basic and Diluted 7,071,849 7,126,849
============= ============
See Notes to Condensed Consolidated Financial Statements.
6
VERITEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended December 31,
2004 2003
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Revenues:
Software $ 1,469,163 $ 657,027
Hardware 45,484 295,340
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Total revenues 1,514,647 952,367
Cost of Sales 42,583 171,479
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Gross Profit 1,472,064 780,888
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Operating Expenses:
Selling, general and administrative 775,255 595,138
Arbitration award 8,174,518 --
Legal 853,656 480,004
Research and development 48,197 110,938
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Total Operating Expenses 9,851,626 1,186,080
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Loss from Operations (8,379,562) (405,192)
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Other Income (Expense):
Interest income 2,654 60
Interest expense (58,979) (63,050)
Other 3,498 54,648
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Total Other Income (Expense) (52,827) (8,342)
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Loss Before Income Taxes (8,432,389) (413,534)
Income Tax Expense -- (906)
------------- -------------
Net Loss $ (8,432,389) $ (414,440)
============= =============
Basic and Diluted Net Loss Per Common Share $ (1.19) $ (0.06)
============= =============
Weighted Average Common Shares Outstanding -
Basic and Diluted 7,071,849 7,126,849
============= =============
See Notes to Condensed Consolidated Financial Statements.
7
VERITEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended December 31,
2004 2003
-------------- --------------
Cash flows from operating activities:
Net loss $ (8,432,389) $ (414,440)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization 23,259 23,712
Amortization of intangibles 6,309 ---
Loss on disposal of equipment 145 ---
(Increase) decrease in operating assets:
Accounts and notes receivable 606,381 159,242
Inventories 4,306 (38,052)
Prepaid expenses 758 (51,571)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 226,278 110,660
Accrued expense - arbitration award 8,174,518 --
Deferred revenue -- 17,856
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Net cash provided (used) by operating activities 609,565 (192,593)
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Cash flows from investing activities:
Purchase of equipment (23,301) --
Proceeds from certificates of deposit 35,745 --
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Net cash provided by investing activities 12,444 --
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Cash flows from financing activities:
Proceeds from (payments on) notes payable -
related parties (50,000) 300,000
Payments on long-term debt (99,499) (21,355)
Proceeds from stock issuance
- - 3,451
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Net cash provided (used) by financing activities (149,499) 282,096
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Effect of exchange rate changes on cash 14,739 8,087
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Increase in cash 487,249 97,590
Cash at beginning of period 394,067 325,193
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Cash at end of period $ 881,316 $ 422,783
============= =============
See Notes to Condensed Consolidated Financial Statements.
8
NOTES TO FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with United States of America generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, the
condensed consolidated financial statements do not include all of the
information and footnotes required by United States of America generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month and six-month periods ended December 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ended June 30, 2005. For further information, refer to the financial statements
and footnotes thereto included in our Form 10-KSB for the year ended June 30,
2004.
Certain amounts presented in the 2003 condensed consolidated financial
statements, as previously reported, have been reclassified to conform to the
2004 presentation. These reclassifications had no effect on net loss or net cash
flows for the periods.
Nature of Business
Veritec, Inc. is primarily engaged in development, marketing and sales of a line
of microprocessor-based encoding and decoding system products that utilize our
patented Vericode(R) Symbol technology. Veritec, Inc.'s readers and scanners
enable a manufacturer or distributor to attach unique identifiers or coded
symbols containing binary encoded data to a product that enables automatic
identification and collection of data. Veritec, Inc. has also developed its
Secured Identification System with its VSCode(TM) that enables the storage of
biometric information of the two-dimensional VSCode(TM) for subsequent
verification of its authenticity. Veritec is a world leader in creating
two-dimensional barcode technology and holds key patents in Europe and the
United States. VIVI-Japan is a wholly-owned subsidiary located in Osaka, Japan.
In November 2003, Veritec, Inc. formed a wholly owned subsidiary, Vcode
Holdings, Inc., a Minnesota corporation, to which it assigned three patents:
U.S. Patent Nos. 4,924,078; 5,612,524 and 5,331,176. Vcode Holdings, in turn,
entered into an exclusive license agreement with Vdata, LLC, an Illinois limited
liability company, for the purpose of enforcement and licensing the patents. The
license agreement provides that all expenses related to the enforcement and
licensing of the patents will be the responsibility of Vdata, LLC. The parties
to the licensing agreement will share in net proceeds arising from the
enforcement or sublicensing of the patents. As of December 31, 2004 there have
been no such proceeds.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Veritec, Inc. and its wholly-owned subsidiaries, VIVI-Japan and
Vcode Holdings, Inc. (collectively referred to as the Company). All intercompany
transactions and balances were eliminated in consolidation.
9
Use of Estimates
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the condensed consolidated financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash Concentrations
The Company maintains its United States based bank balance at one financial
institution. At times, this balance may exceed federally insured limits of
$100,000. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on its cash balances.
Bank balances in Japan are at three banks. These balances are governmentally
insured up to 10,000,000 Yen per bank ($91,393 at December 31, 2004). At times,
these balances may exceed the governmentally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on its cash balances.
Accounts and Notes Receivable
The Company sells to domestic and foreign companies and extends uncollateralized
credit to customers, but generally requires deposits on unique orders.
Management periodically reviews its accounts receivable and provides an
allowance for doubtful accounts after analyzing the age of the receivable,
payment history and prior experience with the customer. The estimated loss that
management believes is probable is included in the allowance for doubtful
accounts. While the ultimate loss may differ, management believes that any
additional loss will not have a material impact on the Companies' financial
position. Due to uncertainties in the settlement process, however, it is at
least reasonably possible that management's estimate will change during the near
term.
Inventories
Inventories, consisting of purchased components for resale, are stated at the
lower of cost or market, applying the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of 3 to 7 years. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts and
the resulting gain or loss is recognized in income. The cost of maintenance and
repairs is expensed as incurred; significant renewals and betterments are
capitalized.
10
Financial Instruments
The fair value of cash, certificates of deposit, accounts and notes receivable,
accounts payable, accrued expenses, and short-term debt approximate their
carrying values due to the short-term nature of these financial instruments.
The carrying value of the subscription receivable is estimated to approximate
its fair value as a result of the 10% interest rate used for imputing interest.
No quoted market value is available for this instrument.
Intangible Assets
Software costs were amortized on a straight-line basis over their estimated
useful life of five years. Technology rights are being amortized on a
straight-line basis over their estimated useful life of three years.
Computer Software Costs
The Company capitalizes certain software development and production costs once
technological feasibility has been achieved. Software development costs incurred
prior to achieving technological feasibility are expensed as incurred.
Management determined that technological feasibility occurred at the time the
Company's software was available for general release to customers. Accordingly,
no computer software development costs have been capitalized in the accompanying
condensed consolidated financial statements.
Long-Lived Assets
The Company reviews its long-lived and intangibles assets to determine potential
impairment by comparing the carrying value of the long-lived assets outstanding
with estimated future cash flows expected to result from the use of the assets,
including cash flows from disposition. Should the sum of the expected future
cash flows be less than the carrying value, the Company would recognize an
impairment loss.
Revenue Recognition
The Company accounts for revenue recognition in accordance with Staff Accounting
Bulletin (SAB) 101 "Revenue Recognition in Financial Statements" and related
amendments and modifications. Revenues from software sales, product sales and
engineering are recognized when products are shipped or services performed.
License fees are recognized upon completion of all required terms under the
agreement. The process typically begins with a customer purchase order detailing
its hardware specifications so the Company can customize its software to the
customer's hardware. Once customization is completed the Company typically
transmits the software to the customer via the Internet. Revenue is recognized
at that point. Once the software is transmitted the customers do not have a
right of refusal or return. Under some agreements the customers remit payment
prior to the Company having completed customization or completion of any other
required services. In these instances the Company delays revenue recognition and
reflects the prepayments as deferred revenue.
11
Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are included in revenues and
shipping and handling costs are included as cost of sales.
Advertising
Advertising costs are expensed as incurred.
Research and Development
Research and development costs are expensed as incurred.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share (EPS) is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the year. Diluted earnings (loss) per common share, in addition
to the weighted-average determined for basic earnings per share, includes
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Common stock
equivalents issuable upon exercise of stock options and warrants, using the
treasury stock method, conversion of the Series H Preferred stock and the
conversion of the notes payable and related accrued interest using the
"if-converted" method are included in the diluted earning (loss) per common
share when dilutive. All such potentially dilutive instruments were antidulitive
for 2004 and 2003.
Going Concern
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As shown in the
accompanying consolidated financial statements, the Company has lost $21,755,837
from inception to December 31, 2004. At December 31, 2004, the Company had a
$9,042,023 working capital deficiency and a stockholders' deficit of $8,954,573
including the "effect" of the arbitration award in the Mitsubishi litigation
received by the Company on February 15, 2005 which is fully explained in Part II
Legal Proceedings. These matters raise a substantial uncertainty that the
Company will be able to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments that may result from this
uncertainty.
The Company has been dependent on The Matthews Group, a related party, to meet
its operating needs. Through December 31, 2004, The Matthews Group has funded
$1,240,741 under the subscription receivable and made prepayments on the
subscription receivable to assist the Company in meeting its cash flow needs.
The Matthews Group has indicated it will continue to meet its obligation under
the subscription receivable, although such obligation may be met by the
conversion of notes payable to The Matthews Group resulting in no cash infusion
to the Company.
12
Certificates of Deposit
The certificates of deposit are marketable debt securities and are classified as
held-to-maturity securities. Cost plus accrued interest approximates fair value.
These securities mature from May 2005 to June 2005.
Notes Payable - Related Parties
In October 2002, the Company's President, Van Tran, loaned $90,000 to the
Company for working capital. This note is unsecured, bears 10% interest and is
due on demand. As of December 31, 2004, this note and related accrued interest
has not been repaid. Accrued interest on this indebtedness totaled $20,527 at
December 31, 2004 and $15,633 at June 30, 2004.
In fiscal years 2003 and 2002, The Matthews Group loaned the Company an
aggregate of $200,000 for working capital. These notes are unsecured, bear 10%
interest and were due May 25, 2003 to June 23, 2003. As of December 31, 2004,
these notes and related accrued interest have not been repaid. Accrued interest
on this indebtedness totaled $39,270 at December 31, 2004 and $29,270 at June
30, 2004.
In June 2003, Veritec entered into an agreement to purchase The Matthews Group's
50% ownership of VIVI-USA. As part of this agreement, the Company issued The
Matthews Group a promissory note of $50,000. The promissory note to The Mathews
Group bears interest at an annual rate of 10% and was due June 25, 2004. As of
December 31, 2004 this note and related accrued interest has not been repaid.
Accrued interest on this indebtedness totaled $7,568 at December 31, 2004 and
$5,068 at June 30, 2004.
In November 2003, a consultant and shareholder of the Company loaned $50,000 to
the Company for working capital. This note was unsecured, bore 10% interest
payable monthly and was due November 12, 2004. This note and all accrued
interest were repaid in September 2004.
Convertible Notes - Related Parties
In April 2002, The Matthews Group loaned $100,000 to the Company for working
capital and to fund its investment in VIVI-USA. This note was convertible at the
option of the holder into common shares of the Company at a convertible rate of
$0.25 per share. This note was unsecured, bore annual 10% interest and was due
March 28, 2003. On December 22, 2004, The Matthews Group exercised its right to
convert the principal amount and all accrued, unpaid interest into common stock
of the Company as of December 31, 2004. The principal of this note of $100,000
and accrued unpaid interest of $27,576 at December 31, 2004, was converted to
510,302 shares of common stock.
The Matthews Group paid an obligation on behalf of the Company to holders of
secured notes payable, collectively called "The Gant Group." Payments by The
Matthews Group to its Gant Group totaled $366,522 (principal - $286,453;
interest - $75,069; and legal fees - $5,000). The amount paid to the Gant Group
plus accrued interest of $30,853 owed to The Matthews Group on these advances
were incorporated into a $397,375 note on December 1, 2000. The note was
convertible at the option of the holder into common shares of the Company at the
rate of $0.10 per share. This note was unsecured, bore 10% annual interest and
13
was due on demand. As of December 31, 2004, the principal amount of $397,374 and
accrued unpaid interest of $162,162 were converted into 5,595,358 shares of
common stock.
In November 2003, Van Tran and Larry Johanns (a principal of The Matthews Group)
loaned $250,000 to the Company for working capital. The notes were convertible
at the option of the holders into common shares of the Company at the rate of
$0.25 per share. These notes were unsecured, bore 10% annual interest and were
due November 14, 2004. As of December 31, 2004, the principal amount of $250,000
and accrued unpaid interest of $28,022 were converted into 1,112,089 shares of
common stock.
Long-Term Debt
Notes payable to banks are due in monthly installments of $9,557, including
interest at 1.3% to 2.5%, collateralized by all corporate assets of VIVI-Japan
and the personal guarantee of VIVI-Japan's President. These notes mature between
March 2005 and December 2009.
Subscription Receivable
In September 1999, the Company accepted a commitment from The Matthews Group LLC
to fund the $2,000,000 required under the bankruptcy plan of reorganization.
This funding is in the form of a promissory note that requires 108 monthly
payments of $18,519. These payments are non-interest bearing and were to be
collateralized by a pledge of properties controlled by principals of The
Matthews Group LLC. In July 2001, the principals of The Matthews Group LLC
granted to the Company a security interest in certain California and Minnesota
properties to partially collateralize the subscription. Imputed interest on the
subscription is excluded from operating results and is instead credited directly
to additional paid-in capital.
From time to time, The Matthews Group made prepayments against its subscription
payable to the Company. These prepayments are unsecured and non-interest
bearing. At December 31, 2004, there were no prepayments. In August 2004, the
Company's President, Van Tran, contributed deferred compensation of $84,333 owed
her to the Prepayment on Subscription Receivable. The balance in the Prepayment
on Subscription Receivable account was adequate to substantially fund the
monthly payments due on the Subscription Receivable by The Matthews Group LLC
through the second quarter ended December 31, 2004. The Prepayment on
Subscription Receivable funded all but $7,066 of the payments due the
Subscription Receivable through December 31, 2004 and the balance was funded by
a contribution by the Company's President Van Tran from accrued deferred
compensation.
The Company has no assurance of the Matthews Group LLC's ability to continue to
provide funding under the subscription receivable. Failure of The Matthews Group
LLC to continue to make scheduled payments on the subscription receivable could
negatively impact the company's ability to meet its cash flow requirements.
Preferred Stock
On December 31, 2004, The Matthews Group exercised its right and converted
75,000 shares of preferred stock into 750,000 shares of the Company's common
stock.
14
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carry forwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
The Company and Vcode Holdings, Inc. file separate U.S. income tax returns.
VIVI-Japan files a separate income tax return in Japan.
The tax effect of net operating loss carryforwards gives rise to a significant
deferred tax asset. Deferred tax assets have been reduced by a valuation
allowance, as it is unlikely they will be realized.
Other Information
None.
15
Item 2. Management's Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
General
The Company is primarily engaged in development, marketing and sales of a line
of microprocessor-based encoding and decoding system products that utilize our
patented Vericode(R) Symbol technology. The Company's readers and scanners
enable a manufacturer or distributor to attach unique identifiers or coded
symbols containing binary encoded data to a product that enables automatic
identification and collection of data. The Company has also developed its
Secured Identification System with its VSCode(TM) that enables the storage of
biometric information of the two-dimensional VSCode(TM) for subsequent
verification of its authenticity. The Company is a world leader in creating
two-dimensional barcode technology and holds key patents in Europe and the
United States.
Through the Company's wholly-owned subsidiary, VIVI-Japan, the Company provides
services to the expanding Liquid Crystal Display markets in Japan and Korea, and
to the emerging markets of Taiwan, China and Southeast Asia. Veritec and
VIVI-Japan are now expanding the market into the Secure ID business worldwide.
In November 2003, the Company formed a wholly owned subsidiary, Vcode Holdings,
Inc., a Minnesota corporation, to which it assigned three patents: U.S. Patent
Nos. 4,924,078; 5,612,524 and 5,331,176. Vcode Holdings, in turn, entered into
an exclusive license agreement with Vdata, LLC, an Illinois limited liability
company, for the purpose of enforcement and licensing the patents. The license
agreement provides that all expenses related to the enforcement and licensing of
the patents will be the responsibility of Vdata, LLC. The parties to the
licensing agreement will share in net proceeds arising from the enforcement or
sublicensing of the patents. As of December 31, 2004 there have been no such
proceeds.
The Company has incurred losses from operations since inception and has an
accumulated deficit of $21,755,837 as of December 31, 2004, including the effect
of the arbitration award described in part II, item I below.
In the Company's Form 10-KSB filed with the Securities and Exchange Commission
for the year ended June 30, 2004 the Company identified critical accounting
policies and estimates for its business. The Company has not amended or changed
any of its critical accounting policies and estimates since the filing of its
Form 10-KSB.
Results of Operations - December 31, 2004 compared to December 31, 2003
Revenues
Revenues of $1,514,647 for the six months ended December 31, 2004 were up by
$562,280 or 59% higher than for the same period ended December 31, 2003. For the
six month period ended December 31, 2004, 91% of revenues or $1,378,329 were
16
from Veritec, Inc. and 9% or $136,318 were from VIVI-Japan. For the six months
ended December 31, 2003, $686,037 or 72% of the revenue for the period was from
Veritec, Inc. and 28% or $266,330 was generated by VIVI-Japan.
For the three month period ended December 31, 2004, revenue of $424,733 was up
$69,676 or 20% higher than for the same period ended December 31, 2003. For this
three month period ended December 31, 2004, $379,555 came from Veritec, Inc. and
$45,178 from VIVI-Japan. For the three months ended December 31, 2003, $272,000
was generated by Veritec, Inc. and $83,057 came from VIVI-Japan. For the three
month period ended December 31, 2004, revenues were down $665,232 from the first
quarter as a result of strong sales in the first quarter from new contracts in
the Asian LCD market.
New distributors added in late fiscal 2004 were primarily in the LCD market. As
a result, revenue is from larger cycle sales and can create somewhat of an
uneven line, due to the fact that additional sales are generated when new
production facilities come on line. Veritec, Inc. is ready to introduce new
products into the marketplace, and current plans are to have the introduction
take place in fiscal 2005 and 2006.
The increase in revenue in 2004 over 2003 is due primarily to revenue generated
from the addition of new distributors in late fiscal 2004. The Company continues
to concentrate its efforts in the Asian market where it believes it has the best
opportunities to grow revenue.
Cost of Sales
Cost of sales of $42,583 for the six month period ended December 31, 2004 were
down by $128,896 or 75% from the same period in 2003, and down 14% on a percent
of sales for the period. The reduction in cost of sales is due to a change in
sales mix with a significant shift to software sales in 2004 which carries a
higher margin as compared to hardware sales which were more dominant in the
sales mix for the period ended in 2003. For the three month period ended
December 31, 2004 cost of sales were down $38,027 or 72% from the same period in
2003, and down 11% as a percent of sales for the same period. The reason for the
reduction was also due to an increase in the higher margin software sales for
the three month ended December 31, 2004.
Operating Expenses
Selling, general and administrative expenses for the three month period ended
December 31, 2004 were up by $102,073 or 32% higher then for the same period in
2003. The more significant increases in 2004 are primarily attributable to
higher accounting fees ($33,386 increase), higher sales and marketing expenses
($25,936 increase) and higher general and administrative salaries ($21,833
increase) due in part to the Company hiring a permanent controller. For the six
month period ended December 31, 2004, selling, general and administrative
expenses were up $180,117 or 30% higher than the same period in 2003. Reasons
for the increase were substantially the same as for the three month period.
Accounting fees were higher ($56,232 increase), sales and marketing expenses
were up (approximately $40,000 increase), there was a transfer of research and
development expense to engineering salaries, and general and administrative
salaries were up ($21,833 increase).
17
Legal expenses for the three months ended December 31, 2004, were down by
$225,890 from the same period in 2003. The reason for the decrease was the
winding down of the Mitsubishi arbitration hearing near the end of the first
quarter 2004. Legal expenses for the six month period ended December 31, 2004
were up $373,652 or 78% from the same period in 2003. The increase is related to
the Mitsubishi arbitration hearing.
Research and development expense for the three months ended December 31, 2004
were down by $35,690 from 2003. For the six month period ended December 31,
2004, research and development expenses were down $62,741, from the same period
in 2003. The reduction in research and development expense is related to
engineering projects in 2003 that were completed or nearly completed in 2003,
allowing for a significant reduction in the research and development effort in
2004.
Capital Expenditures and Future Commitments
The only capital expenditures during either of the six month periods was the
purchase of a vehicle for $23,301 in the six month period ended December 31,
2004.
Although the Company continues to minimize spending for capital expenditures, it
believes its need for additional capital equipment will continue because of the
need to develop and expand its business. The amount of such additional capital
is uncertain and may be beyond that generated from operations.
Liquidity and Capital Resources
A number of uncertainties exist that may affect our future operating results.
These uncertainties include general economic conditions, market acceptance of
our products and our ability to manage expense growth. In particular, these
uncertainties include our ability to reach an accommodation with Mitsubishi
regarding the $8.2 million arbitration award. We do not have sufficient cash to
pay the award, and if we are unable to reach an accommodation with Mitsubishi,
enforcement of the arbitration award, which is expected to be reduced to
judgment in March 2005 after which Mitsubishi can proceed to enforce the award,
will have a significant adverse effect on the Company, including the potential
of seeking protection through bankruptcy proceedings.
The Company has been dependent on The Matthews Group, a related party, to meet
its operating needs. Through December 31, 2004, The Matthews Group has funded
$1,240,741 under the subscription receivable and made prepayments on the
subscription receivable to assist the Company in meeting its cash flow needs.
The Matthews Group has indicated it will continue to meet its obligation under
the subscription receivable, although such obligation may be met by the
conversion of notes payable to The Matthews Group resulting in no cash infusion
to the Company. There is no assurance that The Matthews Group will complete the
obligations or that cash payments, if any, will be adequate. The Company may
need to seek additional debt or equity financing, but there is no assurance that
additional financing will be obtainable, or that any such financing will be
sufficient for our needs.
Net cash provided by operating activities totaled $609,565 for the six months
ended December 31, 2004 as compared to $192,593 of cash used by operating
18
activities in the six months ended December 31, 2003. Cash provided by operating
activities for the three months ended December 31, 2004 consisted primarily of
decreases in accounts receivable of $606,381 and inventory of $4,306, and
increases in accounts payable and accrued expenses of $226,278, offset by net
losses of $257,871. During the six months the Company also made a capital
expenditure of $23,301; repaid an outstanding note payable of $50,000; and paid
down long-term debt by $99,499.
At December 31, 2004, the Company had cash balances and bank certificates of
deposits of $972,709, a working capital deficiency of $9,042,023 and a
stockholders' deficit of $8,954,573 (including the arbitration award received by
the Company on February 15, 2005 which is fully explained in Part II Legal
Proceedings).
The Private Securities Litigation Reform Act of 1995 provides "safe harbor" for
forward-looking statements. Certain information included in this Form 10-QSB and
other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contain statements that
are forward-looking, such as statements relating to anticipated plans for
marketing efforts, research and development, the impact of litigation, and other
business development activities as well as other capital spending, financial
sources, and the effects of competition. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of the
Company. These risks and uncertainties include, but are not limited to,
dependence on major customers, potential competition, and the outcome of
litigation, which may negatively impact the Company's ability to continue in
existence.
Item 3. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer/Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this report. Based on such evaluation, our Chief Executive
Officer/Chief Financial Officer has concluded that, as of the end of such
period, our disclosure controls and procedures are effective.
Internal Control over Financial Reporting
The quarterly review process in fiscal 2004 and the audit of our June 30, 2004
financial statements revealed a need for stronger controls over our financial
reporting system. Improvements needed related to accounting controls over
VIVI-Japan and a general lack of accounting staff. In response to these
concerns, in fiscal 2005 the Company established controls over the accounting
for VIVI-Japan, hired a temporary CFO/Consultant, and now has hired a full time
controller.
Our management, including our Chief Executive Officer/Chief Financial Officer,
does not expect that its disclosure controls and procedures will prevent all
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errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within our company have
been detected. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
On February 15, 2005, the Company received notice from the International Court
of Arbitration of an award in its arbitration dispute with Mitsubishi
Corporation. The arbitration panel dismissed all of Veritec's claims against
Mitsubishi arising out of a series of agreements dating back to the early 90's
and awarded Mitsubishi a total of approximately $8.2 million in compensatory
damages, attorneys fees and costs based on findings that Veritec had breached a
1996 agreement between the parties and infringed a Mitsubishi copyright on its
error detection and correction functionality software ("EDAC"). EDAC is used in
the Veritec's software that writes and reads the Vericode(R) symbol. In
addition, the arbitration panel enjoined Veritec from further violations of the
Mitsubishi EDAC copyright.
Over the last several months, Veritec developed a new, improved EDAC that is
unique, more efficient, modern and entirely independent of the current
Mitsubishi copyrighted EDAC software. All of Veritec software sold from this
point forward for use to write and to read the Vericode(R) symbol will contain
the new EDAC, and we expect to replace the EDAC in existing software as soon as
possible.
At this point, Veritec does not have the resources available to pay the cash
portion of the award, and will be considering all of its alternatives. The
Company's operations had been improving with new alliance partners and
additional distributors to open new markets worldwide but this award is a major
setback. The Company remains hopeful that it will be able to reach a viable
solution, however at this point, we have no assurance that this will be
possible, and could lead to the Company not being able to continue as a going
concern, including seeking protection through bankruptcy proceedings.
On June 30, 2000, we were served as a defendant in the matter of Wolodymyr M.
Starosolsky vs. Veritec, Inc., et al., in the United States District Court for
the Central District of California (Case Number CV-00-7516DT (Wx). This suit was
brought by a shareholder and former director of the Company. The action was
brought against us, and various individuals claiming that certain corporate
actions were taken without proper authority of the Company's board of directors
20
and/or contrary to the plan of reorganization the Company filed and completed
under Chapter 11 of the U.S. Bankruptcy Act. In December 2000, this case was
transferred to the United States District Court for the District of Minnesota. A
trial date has been scheduled for mid 2005. We intend to defend this action
vigorously.
In 2003 a former employee of the Company asserted he was entitled to a fully
vested option to purchase 100,000 shares of Company common stock at an exercise
price of $.088 per share. The Company denies this claim. This former employee
has not proceeded further with this claim. Should such a claim be pursued, the
Company would defend this action vigorously.
Vcode Holdings, Inc. and Vdata, LLC have commenced patent enforcement litigation
against Nokia Corporation in the United States District Court for the Northern
District of Illinois. The litigation is in the discovery phase and no opinion
can be rendered with respect to its outcome.
SEC Reporting Obligations
We are subject to the continuing reporting obligations of the Securities
Exchange Act of 1934 (the "1934 Act"), which, among other things, requires the
filing of annual and quarterly reports and proxy materials with the Securities
and Exchange Commission (the "SEC"). Prior to September 1999, we did not comply
with several filing requirements. To our knowledge, there is no current inquiry
or investigation pending or threatened by the SEC in connection with our prior
reporting violations. However, there can be no assurance that we will not be
subject to such inquiry or investigation in the future. As a result of any
potential or pending inquiry by the SEC or other regulatory agency, we may be
subject to penalties, including among other things, suspension of trading in our
securities, court actions, administrative proceedings, preclusion from using
certain registration forms under the 1933 Act, injunctive relief to prevent
future violations and/or criminal prosecution.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
- ---------------------------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the
period covered by this report.
Item 5. Other Information.
None.
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Item 6. Exhibits.
b. 31. CEO/CFO Certification required by Rule 13a14(a)/15d14(a)
under the Securities Exchange Act of 1934.
32. Veritec, Inc. Certification of CEO/CFO pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss.1350).
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Veritec, Inc.
Date: February 21, 2005 /s/ Van Thuy Tran
------------------ --------------------------------------------
Van Thuy Tran
Chief Executive Officer and Chief Financial Officer
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